Executives seek big profits from small-scale GTL

Tony Hayward, the ex-head of BP, and Roman Abramovich, the billionaire owner of London’s Chelsea Football Club, are vying to prove small-scale plants that turn gas into liquid fuel can make a profit.

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By EDUARD GISMATULLINE

Bloomberg

Tony Hayward, the ex-head of BP, and Roman Abramovich, the
billionaire owner of Londons Chelsea Football Club, are
vying to prove small-scale plants that turn natural gas into
liquid fuel can make a profit.

The technology is attractive today for two reasons. First,
the shale boom in North America has flooded the market with
gas, making it cheap relative to oil. Second, in many
countries drillers are no longer allowed to burn off gas
thats a byproduct of oil drilling.

The market to stop gas flaring at oil fields alone could be
worth $375 billion, according to Oswald Clint, a Sanford C.
Bernstein & Co. analyst in London. While a $19 billion
Royal Dutch Shell project in Qatar has proved
gas-to-liquids works in very large plants, the challenge is
making it economic on a smaller scale.

The primary problem has been confidence that the technology can be deployed
commercially, said Hayward, who invested in February in
CompactGTL, which plans to convert gas into liquids at
Brazilian oil platforms.

Once commercial proof of the concept has been
delivered, and once we have a plant operating that has made
an acceptable return on investment, then perceptions will
change, he said in an e-mail.

Stepped In

Hayward and his partner Ian Hannam, an ex-JPMorgan Chase
& Co. banker, together stepped in to restructure the
unprofitable business in February.

Abramovich, who made billions in the Russian oil industry,
has been building its stake in Velocys Plc, a $400 million
company thats working on technology to make fuel from
shale gas in the US.

Small-scale projects located in places where the gas
would otherwise be flared essentially have zero or even
negative feedstock costs, said
Meredith Annex, a New York- based analyst at Bloomberg New
Energy Finance. This allows them to be much more
cost-competitive than large-scale projects in regions where gas is
market-priced.

Velocys and CompactGTL, both based in the UK, are working on
gas-to-liquids plants with a maximum capacity of 15,000 bpd,
which is about a 10th the size of Shells Pearl venture
in Qatar, the worlds largest. Chevron this year started
work on a 33,000 bpd Escravos plant in Nigeria, expected to
cost $8.4 billion.

Even on a smaller scale, gas to liquids is expensive. The
plants cost about $100,000 for each barrel of capacity to
produce liquid fuels. Both companies say that they can make
the business profitable.

Commercial Prospects

Weve made several investments in green energy
over the past couple of years, said John Mann, a
spokesman for Abramovich. We identified this field as
one with good commercial prospects as well as the potential
for a positive impact on the environment.

In addition to earning money from flared gas, GTL can also
make fuel at remote fields without pipelines to markets. The
key component of the gas-to-liquids conversion is the
Fischer-Tropsch reaction pioneered by German scientists Franz
Fischer and Hans Tropsch almost a century ago.

On July 29, CompactGTL and undisclosed investors agreed to
spend $50 million to build the worlds first
commercial small-scale GTL plant in Kazakhstan, set to
start at the end of 2017.

The same day, Velocys along with USs Waste Management
Inc. and NRG Energy Inc. said it would build a plant in
Oklahoma that will take less than 24 months to enter
full commercial operation, the UK company said.

Energy Revolution

GTL production has the potential to produce the equivalent of
32 billion bbl of liquids, or about a years worth of
global oil demand, Bernstein analysts wrote in a November
report titled What if Small-Scale Gas to Liquids Was
the Next Shale Gas? Are We on the Verge Of Another Energy
Revolution?

Velocys is using technology developed at the US
Pacific Northwest National Laboratory in the 1990s for space
exploration, said Roy Lipski, the companys CEO. The
micro-channel technology, developed for reactors to make
oxygen in space, can be used to convert synthetic gas into
fuels.

Extra-Terrestrial

The US government retains rights to micro-channels for
extra-terrestrial applications, Lipski said.

Some oil companies, including Frances Total, have
supported Velocyss research, while Shiloh Industries
Inc. of the US has invested in manufacturing capacity to make
reactors, Lipski said.

CompactGTL and Velocys are now competing to fit their GTL
reactors to floating production units planned by Petroleo
Brasileiro SA, or Petrobras, which is developing giant oil
discoveries off Latin America.

It is a huge global market opportunity, said Iain
Baxter, a COO at CompactGTL. We welcome competition,
there is plenty of room.

CompactGTL, with the help of founding shareholder Coller
Capital, adopted the research started in 2000 by Accentus,
which at that time was part of the UK nuclear industry.
Coller is still a major stakeholder in the company after the
arrival of Hayward and Hannam, Baxter said.

Offshore Gas

Several oil companies are interested in CompactGTL reactors
in addition to Petrobras, he said, declining to name any. The
company is courting new projects in Russia and some former
Soviet republics.

The partners are still working together, and we are
excited about CompactGTLs first onshore project, which
will help to mature the technology, said Paula
Farquharson- Blengino, a spokeswoman at SBM Offshore.

Petrobras has identified the need to gather further
information about the GTL technologies currently under
assessment, said Danielle Chevrand, a spokeswoman at
Petrobras. Thus, the company will wait for the
conclusion of the studies before it can evaluate the projects
associated with these technologies.